ECB Bazooka Provides Some Relief

Posted on

March 19, 2020
ECB bazooka calms markets a bit
SNB keeps rates same
Nikkei -1.04% Dax 1.97%
UST 10Y 1.17%
Oil $23/bbl
Gold $1484/oz
BTCUSD $5425

Asia and EU
SNB rates at -75bps

North America Open
USD Weekly jobless 8:30
CAD ADP Employment

Global financial markets settled down a bit with futures trading higher in morning European dealing after ECB came out with a commercial paper facility and basically reassured the markets that it would be a buyer of last resort.

The ECB came out with a 750 Billion euro program called Pandemic Emergency Purchase Programme (PEPP) that would essentially serve as a backstop in the credit markets.

In its statement, ECB noted, “The Governing Council will do everything necessary within its mandate. The Governing Council is fully prepared to increase the size of its asset purchase programs and adjust their composition, by as much as necessary and for as long as needed. It will explore all options and all contingencies to support the economy through this shock.
To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfill its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face. The ECB will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.”

The news helped stabilize periphery bonds especially the Italian BTPs which saw its yields fall, but the near-universal application if this rule to the whole region regardless of credit quality also saw Greek bonds rally.

Overall, this was the minimal necessary step to bring a modicum of calm to the markets after ECB chief Christine Legarde made her faux pas last week by not explicitly supporting stabilizing Italian yields. Still, the response has been less than euphoric as markets continue to worry about the economic fallout from the COVID-19 global lockdown. Today’s German IFO report showed business sentiment at its lowest level since 1991 with forecasters predicting a -6% contraction in Q2 GDP.

Meanwhile, the one asset that has been relentlessly bid is the dollar that has appreciated across the board as the demand for safety, as well as financing needs, have pushed the buck to multi-year highs against all the majors. With the dollar shortage so acute in the global financial system, there is now speculation that FX intervention may be next. Certainly, the Trump administration will look askew at the strength of the dollar as it will hamper any possible post-COVID recovery and with some G-11 currencies now trading at all-time lows central banks will look support the exchange rates so a coordinated effort may be the next step.

In North America today the market will get its first look at the fallout from the COVID lockdowns as the US Department of Labor will report unemployment claims. Expectations are for a modest bump higher, but that is clearly a function of stale data. The general average has been about 200K per week, but if today’s number jumps to double that it could put further downward pressure on stocks at the start of the day.

Boris Schlossberg
Managing Director

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